role of banking sector in secondary market

ROLE OF BANKING SECTOR IN SECONDARY MARKET

Chapter 1

Indian banking sector

1.1] Introduction

The banking section will navigate through all the aspects of the Banking System

in India. It will discuss upon the matters with the birth of the banking concept in

the country to new players adding their names in the industry in coming few

years. The banker of all banks, Reserve Bank of India (RBI), the Indian Banks

Association (IBA) and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc.

has been well defined under three separate heads with one page dedicated to

each bank. However, in the introduction part of the entire banking cosmos, the

past has been well explained under three different heads namely:

History of Banking in India

Nationalisation of Banks in India

Scheduled Commercial Banks in India

The first deals with the history part since the dawn of banking system in India.

Government took major step in the 1969 to put the banking sector into systems

and it nationalized 14 private banks in the mentioned year. This has been

elaborated in Nationalization Banks in India. The last but not the least explains

about the scheduled and unscheduled banks in India. Improved performance of

the banking industry in India has helped the economy to bounce back to a

positive growth level. According to the Reserve Bank of India (RBI), the

banking sector in India is sound, adequately capitalized and well-regulated.

Indian financial and economic conditions are much better than in many other

countries of the world. Credit, market and liquidity risk studies show that Indian

banks are generally resilient and have withstood the global downturn well.

According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled

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Commercial Banks: March 2009', nationalized banks, as a group, accounted for

49.5 per cent of the aggregate deposits, while State Bank of India and its

Associates accounted for 24.1 per cent. The shares of other scheduled

commercial banks, foreign banks and regional rural banks in aggregate deposits

were 18.2 per cent, 5.2 per cent and 3.0 per cent, respectively. Nationalized

banks held the highest share of 50.5 per cent in the total bank credit followed by

State Bank of India and its associates at 23.1 per cent and other scheduled

commercial banks at 18.2 per cent. Foreign banks and regional rural banks had

slightly lower share in the total bank credit at 5.9 per cent and 2.3 per cent,

respectively.

According to the RBI in March 2009, number of all Scheduled Commercial

Banks (SCBs) was 171 of which, 86 were Regional Rural Banks and the

number of Non-Scheduled Commercial Banks including Local Area Banks

stood at 5. Taking into account all banks in India, there are overall 56,640

branches or offices, 893,356 employees and 27,088 ATMs. Public sector banks

made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82

per cent of staff and 60.3 per cent of all automated teller machines (ATMs).

Also, growth of aggregate deposits of all Scheduled Commercial Banks (SCBs)

including Regional Rural Banks (RRBs) up to March 27, 2009 stood at 19.8 per

cent while overall nationalized banks was at 24.7 per cent, foreign banks at 7.8

per cent and private sector banks about 8.0 per cent.

According to the RBI, gross bank credit offered by all Scheduled Commercial

Banks (SCBs) including Regional Rural Banks (RRBs) grew by 17.3 per cent

up to March 2009. Public sector banks' credit grew by 20.4 per cent, foreign

banks' credit by 4 per cent and private sector banks about 10.9 per cent.

2


Deposits with scheduled commercial banks (SCBs) surged by US$ 13.41 billion

in the fortnight ended July 3, as against an accumulation of US$ 1.29 billion in

the previous fortnight. In the said fortnight, time and demand deposits jumped

by US$ 8.92 billion and US$ 4.49 billion, respectively. Credit offtake from the

SCBs was up by US$ 5.8 billion. Corporates, MSMEs, agriculture, and the

retail sector have been borrowing strongly, according to major bankers in the

country. The government's huge borrowing programme, investments by banks,

predominantly in government securities, were higher at US$ 9 billion in the July

3 ended fortnight as against an investment of US$ 4 billion in the preceding

fortnight.

Non-resident Indians (NRIs) have cumulatively placed US$ 1.167 billion as

deposits with banks in the April-May 2009-10 period as against US$ 452

million in the corresponding period last year. NRIs are finding it remunerative

to park their money with Indian banks, which are offering higher interest rates.

In the April-May 2009 period, NRIs deposited almost US$ 543 million in

Foreign Currency Non-Resident (Banks) deposits. In the corresponding period

last year, they had pulled out US$ 291 million from the FCNR (B) deposits.

The new borrowing level for April-September 2009 has been set at US$ 62.85

billion—nearly 25 per cent more than the March 2009 projection of US$ 50.66

billion—jointly by the Finance Ministry and the Reserve Bank of India (RBI).

During 2008-09, non-food bank credit (year-on-year basis) stood at 17.5 per

cent by March 2009.India's foreign exchange reserves were US$ 252.0 billion

as at end-March 2009 which increased to US$ 253.0 billion by April 10,

2009.The country's largest bank – the State Bank of India's (SBI) branch

network, increased by 470 to over 11,900 branches. Based on March-end 2009

figures, SBI's deposits increased by US$ 6 billion to US$ 152.32 billion and

advances by US$ 4.57 billion to US$ 120 billion.

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Boosted by gains from gilts, corporate debt and equity, Axis Bank and HDFC

Bank have posted healthy net profit growth of 70 per cent and 30 per cent

respectively, for the quarter ended June 30, 2009.

Public sector banks too are now being approached by more customers owing to

low interest rates and better-managed and transparent operations. An analysis

by Crisil Research reveals that the increasing customer preference for public

sector banks is evident by the rise in their market share by more than 10 per cent

over the last one year. The share of the PSBs has in fact risen to 40 per cent of

the total vehicle finance portfolio as against 25-30 per cent earlier. Private

Banks have retained their share at 50 per cent.

ICICI Bank has organised road shows in Asia, Europe and the US, jointly with

the Union Ministry of Road Transport and Highways to attract investments for

highways and roads. To begin with, the bank organised a meeting between

potential investors and the Union Minister of Road Transport and Highways,

Mr. Kamal Nath. HDFC Bank has signed an agreement with Guruvayoor

Devaswom for offering e-collection through HDFC Bank Payment Gateway.

1.2] Banking services in India

With years, banks are also adding services to their customers. The Indian

banking industry is passing through a phase of customers market. The

customers have more choices in choosing their banks. A competition has been

established within the banks operating in India. With stiff competition and

advancement of technology, the service provided by banks has become more

easy and convenient. The past days are witness to an hour wait before

withdrawing cash from accounts or a cheque from north of the country being

cleared in one month in the south. This section of banking deals with the latest

discovery in the banking instruments along with the polished version of their

old systems.

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1.3] Government Initiatives

In its platinum jubilee year, the RBI, the central bank of the country, in a

notification issued on June 25, 2009, said that banks should link more branches

to the National Electronic Clearing Service (NECS). Ideally, all core-banking-

enabled branches should be part of NECS. NECS was introduced in September

2008 for centralized processing of repetitive and bulk payment instructions.

Currently, a little over 26,000 branches of 114 banks are enabled to participate

in NECS.

The reduction in the Reserve Bank's policy rates and easy liquidity conditions in

the market have helped all public sector banks, most private sector banks and

some foreign banks reduce their deposit and lending rates. Term deposit rates

between October 2008-April 18, 2009 have been reduced by a range of 125-250

basis points by public sector banks, 75-200 basis points by private sector banks

and 100-200 basis points by five major foreign banks. The reduction in the

range of BPLRs was 125-225 basis points by public sector banks, followed by

100-125 basis points by private sector banks and 100 basis points by five major

foreign banks.

Since mid-September 2008 till date, the Reserve Bank has cut the repo rate by

400 basis points to 5 per cent and the reverse repo rate by 250 basis points to 3.5

per cent. The CRR was also reduced by 400 basis points of NDTL of banks and

stood at 5 per cent.

Apart from the bank rate cuts announced in the stimulus packages, cash

withdrawals from bank will not attract tax from April 1, 2009 following

abolition of the banking cash transaction tax (BCTT) in the Union Budget 2008-

09. Also, inter-ATM usage transaction became free of charges effective April 1,

2009.

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1.4] STRUCTURE OF THE BANKING SECTOR

According to the RBI definition, commercial banks which conduct the business

of banking in India and which (a) have paid up capital and reserves of an

aggregate real and exchangeable value of not less than Rs 0.5 mn and (b) satisfy

the RBI that their affairs are not being conducted in a manner detrimental to the

interest of their depositors, are eligible for inclusion in the Second Schedule to

the Reserve Bank of India Act, 1934, and when included are known as

‘Scheduled Commercial Banks’. Scheduled Commercial Banks in India are

categorized in five different groups according to their ownership and/or nature

of operation. These bank groups are (i) State Bank of India and its associates,

(ii) Nationalised Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v)

Other Indian Scheduled Commercial Banks (in the private sector). All

Scheduled Banks comprise Schedule Commercial and Scheduled Co-operative

Banks. Scheduled Cooperative banks consist of Scheduled State Co-operative

Banks and Scheduled Urban Cooperative Banks.

.

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1.5] Foreign Banks In India

Foreign Banks in India always brought an explanation about the prompt

services to customers. After the set up foreign banks in India, the banking sector

in India also become competitive and accurative. A new rule announced by the

Reserve Bank of India for the foreign banks in India in this budget has put up

great hopes among foreign banks which allow them to grow unfettered. Now

foreign banks in India are permitted to set up local subsidiaries. The policy

conveys that foreign banks in India may not acquire Indian ones (except for

weak banks identified by the RBI, on its terms) and their Indian subsidiaries

will not be able to open branches freely. Please see the list of Foreign banks in

India till date.

List of Foreign Banks in India

ABN-AMRO Bank

Abu Dhabi Commercial Bank

Bank of Ceylon

BNP Paribas Bank

Citi Bank

China Trust Commercial Bank

Deutsche Bank

HSBC

JPMorgan Chase Bank

Standard Chartered Bank

Scotia Bank

Taib Bank

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http://finance.indiamart.com/investment_in_india/abn_amro.html

http://finance.indiamart.com/investment_in_india/taib_bank.html

http://finance.indiamart.com/investment_in_india/scotia_bank.html

http://finance.indiamart.com/investment_in_india/standard_chartered_bank.html

http://finance.indiamart.com/investment_in_india/jpmorgan_chase_bank.html

http://finance.indiamart.com/investment_in_india/hsbc_bank.html

http://finance.indiamart.com/investment_in_india/deutsche_bank.html

http://finance.indiamart.com/investment_in_india/china_trust_commercial_bank.html

http://finance.indiamart.com/investment_in_india/citi_bank.html

http://finance.indiamart.com/investment_in_india/bnp_paribas_bank.html

http://finance.indiamart.com/investment_in_india/bank_of_ceylon.html

http://finance.indiamart.com/investment_in_india/abu_dhabi_commercial_bank.html


By the year 2009, the list of foreign banks in India is going to become more

quantitative as numbers of foreign banks are still waiting with baggage to start

business in India.

The Scheduled Commercial Banks (SCBs) in India have shown an

impressive growth from FY04 to the mid of FY09. Total deposits,

advances and net profit grew at CAGR of 19.6%, 27.4% and 20.2%

respectively from FY03 to FY08. Banking sector recorded credit growth

of 33.3% in FY05 which was highest in last 2 and half decades and credit

growth in excess of 30% for three consecutive years from FY04 to FY07,

which is best in the banking industry so far. Increase in economic activity

and robust primary and secondary markets during this period have

helped the banks to garner larger increase in their fee

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Chapter 2

Indian capital Market

INDIAN CAPITAL MARKET

Capital market

Every company needs long-term as well as short-term capital. Long-term capital

is required essentially for investment in fixed assets such as land, building, plant

and machinery, vehicles, etc. It also includes core working capital and certain

kinds of R&D, pre-operating expenses and preliminary expenses incidental to

setting up a business, which are required to be deployed or incurred for the

production or rendering of goods and services. Short-term capital or working

Primary Market

New issues by new companies

and government.

Further issues by existing

companies and government.

(Issue are securities like equity

shares, preference shares,

debentures, bonds, govt.

securities, etc.)

Secondary Market

Trading in existing securities.

Listing of the new issues for

investments and disinvestments

by savers/investors.

Imparting liquidity or

encashability to stocks and

shares.

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capital on the other hand, is required essentially for financing the requirements

of the day-to-day operations of the business, such as raw materials, work-in-

progress, finished goods, trade debtors, etc. capital market is thus a broad term,

which includes primary markets, secondary markets, term lending institutions,

long-term bonds and debenture markets, banks, investors, and almost anybody

who is engaged in providing long-term capital(whether equity or debt capital) to

the industrial sector. Year 2008 was the most eventful year for the capital

market. The year that started on the bull note has lost their entire lustrous gain

that they gained in 2007 .This was sparked by the subprime crisis and their

ripple effects, bad economic news started from the USA and spread throughout

the world and the effect was so cascading that they ruined the sentiments in

capital markets globally and indexes of global market secularly crashed more

than 65%. Any positive development, long term growth story, fundamental

storey everything blown by bears that came in hurry.

SBI CAPITAL MARKETS LIMITED (SBICAPS)

It is India's leading investment bank and project advisor, assisting domestic

companies fund-mobilisation efforts for last many years. Foreseeing the

changing needs of clients in a rapidly opening economy, over the years, we

have evolved an array of advisory services in almost all sectors of the economy.

We are known for professionalism and business ethics and provide a full range

of Investment, Advisory and Financial Services under one umbrella. A pioneer

in privatisation in India, we have established ourselves as a leader in providing

financial and advisory services in the core sector and infrastructure industries.

We began operations in August 1986 as a wholly owned subsidiary of the State

Bank of India, which is the largest commercial bank in India. In January 1997,

fresh equity shares were issued to Asian Development Bank (ADB) and ADB

now holds 13.84% stake in the equity of SBICAPS. The distinguished parentage

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(with a 86.16% stake) together with the long standing association of an

internationally renowned financial institution like the Asian Development Bank

further enhances our image as a truly 'World Class Investment Bank'.

Our Mission - To provide Credible, Professional and Customer Focused world-

class investment banking services.

Our Vision - To be the best India based Investment Bank.

Our Services

We are an edge above others when it comes to understanding the needs of the

client. A comprehensive analysis of the dynamics of the markets and an

extensive knowledge about the regulatory environment gives us a wider view of

all the aspects of this highly competitive market. We tower above others as the

thought leaders in analysing and interpreting industry trends, both at micro and

macro levels.

Pension funds turn towards capital market (PFRDA)

The PFRDA is yet to define the options, though as per the reports, the two

prominent options for the investing subscriber are likely to be 100% in gilt-

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edged securities (government bonds0 and 15% in the capital market (5% in

equity and 10% in bonds).One of the conspicuous features of the NPS that

seems to have generated a natural debate among economists and investors, is

the provision permitting investment of a part of the pension corpus in the stock

market. The government is also permitting the pension funds to deploy in

capital market at the discretion of the subscriber for adequate return. “The

central government will notify an interim investment pattern for the funds

collected under the NPS, to allow 5% investment of the corpus in stock market

and another 10% in corporate bonds or reliable bonds. Since, the contributory

NPS was introduced for all fresh government recruits in January 2004, about

RS.1, 500cr have accumulated in public accounts at the center and in 17 states,

which have adopted the scheme”. The initiative will allow more funds to flow

into the market and provide an opportunity for better returns to NPS

subscribers. The NPS corpus earns only 8% interest at present. If the fund

managers convince the sub scribers to avail themselves of the option of going

to the stock market for higher returns, the latter need to consider the financial

risk involved.

Capital inflow

Presently, India ranks second in capital market inflows. The total foreign

institutional investment (FII) till date (19 November 2007) in the Indian markets

zoomed to over $17.230 billion. The private equity (PE) investment is also on

the rise. According to Thomson financial, India has replaced Taiwan from the

second spot in the Asia-Pacific private equity rankings in the first half of

calendar 2007. India has attracted the higher private equity (PE) investments at

$10 billion in 2007 so far. The Indian real estate and infrastructure sector have

been a key contributor to this rising inflows. Out of $10 billion PE fund that

India attracted so far, $5 billion came in these sectors.

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2.1] Primary Market

The primary market is that part of the capital markets that deals with the

issuance of new securities. Companies, governments or public sector

institutions can obtain funding through the sale of a new stock or bond issue.

This is typically done through a syndicate of securities dealers. The process of

selling new issues to investors is called underwriting. In the case of a new stock

issue, this sale is an initial public offering (IPO). Dealers earn a commission

that is built into the price of the security offering, though it can be found in the

prospectus.

Features of primary markets are:

This is the market for new long term equity capital. The primary market

is the market where the securities are sold for the first time. Therefore it

is also called the new issue market (NIM).

In a primary issue, the securities are issued by the company directly to

investors.

The company receives the money and issues new security certificates to

the investors.

Primary issues are used by companies for the purpose of setting up new

business or for expanding or modernizing the existing business.

The primary market performs the crucial function of facilitating capital

formation in the economy.

The new issue market does not include certain other sources of new long

term external finance, such as loans from financial institutions. Borrowers

13

http://en.wikipedia.org/wiki/Prospectus

http://en.wikipedia.org/wiki/Initial_public_offering

http://en.wikipedia.org/wiki/Underwriting

http://en.wikipedia.org/wiki/Bond_(finance)

http://en.wikipedia.org/wiki/Stock

http://en.wikipedia.org/wiki/Funding

http://en.wikipedia.org/wiki/Security_(finance)

http://en.wikipedia.org/wiki/Capital_market


in the new issue market may be raising capital for converting private

capital into public capital; this is known as "going public."

The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market are:

Initial public offering;

Rights issue (for existing companies);

Preferential issue.

Indian IPO market

IPO means initial public offering which is a method to raise money from the

public to meet a company’s expense by issuing shares. These shares are offered

to the public in a price band range, which means that the price of the shares

issued ranges between two amounts. These shares are also offered to the

financial institutions as well. It is the primary market.

The new IOP that come in future

It is estimated that Indian needs about US$475 bn between 2007 and 2012 to

upgrade its roads, expand and modernize its ports, improve its rail services and

boost power generation. In coming years more IOP will be coming from the

infrastructure and sectors.

Canara Bank plans initial public offering

Bangalore: Canara Bank is planning to come up with an initial public offering

(IPO) of Rs 175 crore to Rs 225 crore in August or September 2002. The work

towards fixing the issue price and the appointment of merchant bankers will

begin this month.

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http://en.wikipedia.org/wiki/Rights_issue

http://en.wikipedia.org/wiki/Initial_public_offering


Currently Canara Bank has an equity capital base of Rs 578 crore, says Canara

Bank chairman R V Shastri.

Declining to detail the possible premium on the forthcoming issue, Shastri says:

“Though there will be a good premium, it will be made affordable to the

public.” The bank also rules out the book-building route to subscribe the issue.

“We will go to the public directly.” Canara Bank has decided to come out with

the IPO irrespective of the prevailing market conditions. The tier-II

capitalisation route is not attractive because securities are treated as

subordinated debts as long as the maturity period does not exceed five years.

IPO – Role of Underwriter

When a company wants to raise funds through initial public offering (IPO) it

appoints an investment bank for underwriting the issue. An Investment bank is

also called as merchant bank. There is no regulatory restriction to use the

services of a merchant bank for IPO. Since in an IPO a company participates for

the first time, it doesn’t have complete understanding of the rules and

documentation, required to be submitted, to get a clearance from the regulator.

Famous merchant bankers world over are Goldman Sachs, Credit Suisse and

Morgan Stanley. Banks like Deutsche, Citi, UBS etc have investment banking

wings. Underwriters assess and analyze firm’s current performance, firm’s

future earnings potential, industry scenario, competition in the same sector,

current local and global market situations etc. to decide the issue price/price

band. They also work on the activities like completion of the mandatory

documentation as required by the regulatory body. Underwriters charge a fee for

this activity, which is generally a percentage of the issue size.

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http://lastbull.com/ipo-%E2%80%93-role-of-underwriter/

http://lastbull.com/what-is-ipo


If the issue size is very large a syndicate of merchant banks takes up the task

of underwriting the issue. However one merchant bank leads the other.

2.2] Secondary market

Meaning

Secondary market (stock exchange) is one in which an investor purchases

an asset from another investor, rather than an issuing corporation. The

defining characteristic of the secondary market is that investors trade

among themselves on previously issued securities without the

involvement of the issuing companies (except in the case of buy-back).

The investors could be institutions like FIIs, mutual funds, insurance

companies or individuals.

The secondary market is the financial market for trading of securities that

have already been issued in an initial private or public offering.

Alternatively, secondary market can refer to the market for any kind of

used goods. The market that exists in a new security just after the new

issue, is often referred to as the aftermarket. Once a newly issued stock is

listed on a stock exchange, investors and speculators can easily trade on

the exchange, as market makers provide bids and offers in the new stock.

Definitions

Some of the important definitions are presented below:

According to husband and dockery, “securities or stock exchanges are

privately organized markets which are used to facilitate trading in

securities.”

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According to Hastings, “stock exchange or securities market comprises

all the places where buyers and sellers of stocks and bonds or their

representatives undertake transactions involving the sale of securities.”

According to Derek honeygold, “ stock exchange can be described as the

place where a marriage of convenience is enacted between those who

wish to raise capital, such as companies, governments and local

authorities, and those who to invest largely households through the

medium of institutions acting upon their behalf.”

According to section 2(3) of the securities contract (regulation) act 1956,

“The stock exchange has been defined as any body of individuals whether

incorporated or not, constituted for the purpose of assisting, regulating or

controlling the business of buying, selling or dealing in securities.”

Objectives of secondary market

To examine the new bench marks in the secondary market in India.

To study the selected secondary market development indicators in India.

To analyze the trading intensity in the world stock exchanges.

To explore opportunities for the growth of RSEs in India.

To learn the threats for the growth of RSEs in India.

To suggest the ways to overcome the threats for the growth of RSEs in

India.

To examine the present disclosure standards for the protection of

investors in the Indian capital market.

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To analyze the powers of SEBI to take punitive or preventive measure for

the protection of investors.

To study the Role of SEBI for the Redressal of investor grievances in the

Indian capital market.

To explain the investor awareness/ assistance/ education programmes

arranged by SEBI.

To suggest the Recommendations for strengthening investor confidence

in the Indian capital market

Function

In the secondary market, securities are sold by and transferred from one

investor or speculator to another. It is therefore important that the secondary

market be highly liquid and transparent.

Secondary market role

In a growing market for commercial banks, where can the secondary

market play a role?

Secondary market investors must continue to play a larger strategic role in

furnishing capital. Many banks don’t possess the massive economies of scale

needed for growth and their available capital is limited.

By developing partnerships with secondary market investors, brokers and

bankers increase their profitability potential by seizing new opportunities for

capital. Further, lenders can benefit from the increased array of funding options

offered by secondary market investors permitting lenders to choose the level of

risk most appropriate for their business. In an industry that barely existed a little

18


over a decade ago, secondary market investors create a huge strategic

competitive advantage for lenders needing additional liquidity. Lenders can

safely clear off their warehouse loan inventory by building relationships with

secondary market investors, creating new opportunities for additional growth

and profitability. Equally important, banks and mortgage lenders can reduce

their risk-based capital portfolios by tapping into the multiple options offered by

secondary market investors. Because of loan quality requirements, the

secondary. Market also indirectly improves the mortgage industry by forcing

banks and mortgage lenders to run a clean and efficient operation before they

can do business in the secondary market. In the present environment, financial

institutions – whether in the primary or secondary markets – have a tremendous

opportunity for strong and increased growth. The positive opportunities for

lenders to leverage the multiple services offered by secondary market investors

are there for the taking.

Changing regulations of secondary market

The Indian securities market is in transition. Several important changes were

brought for the smooth and effective functioning of stock exchanges from the

time to time by the SEBI. The revolutionary changes have been taking place

over a period of time. In fact, on almost all the operational and systematic risk

management parameters, settlement system, disclosures, accounting standards,

the Indian securities market is at par with the global standards. Some of those

initiatives taken place in the secondary market are discussed below:

Overall administration, supervision and control of the stock

exchanges

The central government for the first time in April 1988 constituted an

administrative body viz. securities and exchange board of India and in January

1992, the central government enacted an Act granting a statutory recognition to

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the securities and exchange board of India as a regulator of the securities/

markets. The governing board of the council to be consisting of total 10

members, 4 from stock exchanges, 4 from government, corporate finance,

commerce, accountancy, management and law and 2 from investment and

development finance institutions.

Membership of the stock exchange

Minimum basic educational qualification is 12th standard or equivalent and

graduation after 5 years. Members to have reasonable background in economics,

corporate finance, taxation, etc. The stock exchanges have to approve members

(trainers) to impart adequate knowledge and training to aspirants for

membership. Financial institutions, commercial banks and companies are

also eligible for membership of stock exchanges. Membership is to be open to

a qualified person at any time. Multiple memberships are allowed to member to

encourage provision of better services to the investing public and to further the

healthy development of capital market

Public issues

The companies eligible to make a public issue can freely price their equity

shares or any security convertible into equity at a later date in cases of public/

rights issues by listed companies and public issue by unlisted companies. In

addition, eligible infrastructure companies can freely price their equity shares

subject to compliance of disclosure norms of SEBI. The public and private

sector banks can also freely price their shares subject to approval by RBI .

A company may issue shares to applicants in the firm allotment category at

higher price than the price at which securities are offered to public. Further an

eligible company is free to make public/ rights issue in any denomination

determined by it in accordance with sub-section (4) of section 13 of the

companies Act, 1956 and SEBI norms.

Risk management

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In the equipment leasing industry, application of the liquidity and hedging tools

of modern corporate finance has lagged behind other sectors of the financial

services business. The creation of a deep and liquid secondary market for lease

assumptions will enable liquidity to be made available and provide more

flexibility to both lessees and lessors. For a better appreciation of how this

might come about, this article presents an economic and financial analysis of

the developing secondary market for lease assumption. A continuing

development in corporate finance has been the sophisticated risk management

methodologies involving credit enhancement, hedging through derivative

securities, and techniques and structures such as securitization for improved

liquidity. This paper presents a brief economic and financial analysis of the

developing secondary market for lease assumption, focusing on the incentive

structure and the underlying rationale for a secondary market. The enhanced

optionality and liquidity that this advance in the state of the art permits has the

potential to create value for all market participants and, in particular, significant

risk management benefits for lessors.

Systems audit

Trading, settlement and risk management system of stock exchanges are almost

completely automated. For this reason, it becomes very important that the

systems do not have deficiencies which can impair their efficacy. It also

becomes important to ensure that the stock exchanges have suited disaster

recovery sites and business continuity plans and that the systems are adequately

secure. Active stock exchanges have been asked to carry out system audit

through external agencies competent to carry system audit exercise. SEBI does

follow-up for rectification of deficiencies pointed out in the systems audit

reports. In 2004-2005 too. Such follow-up was done through offsite analysis of

compliance reports from stock exchanges and meeting with the senior

management of stock exchanges.

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Institutionalization

Capital market are said to be more efficient when they have more participants,

instruments, processes and other alternatives. Indian capital market was

dominated by individual investors till early part of the 1990’s. Earlier

institutional investors such as life insurance Corporation of India, General

Insurance Corporation of India and its four subsidiaries, Development

financial institutions, banks etc., used to take minor role in the capital

market activity. Unit trust of India, the only mutual fund then, used to play

active role in the primary market and secondary capital market. 1990s saw entry

of many new participants to the capital market. SEBI permitted private sector

and joint sector (Indian as well as foreign), mutual funds. Government of India

and SEBI allowed foreign institutional investors, non-resident Indians and

overseas corporate bodies to trade in securities. Additionally, non-banking

finance companies also have been taking interest in dealing in securities. Thus,

the variety of participants taking interest in the Indian capital market

substantially increased and the current variety is as large as is available in any

other developed market.

DIFFERANCE BETWEEN PRIMARY MARKET AND SECONDARY

MARKET

A company cannot easily find investors its securities (shares or

debentures) from the public if they cannot subsequently trade these shares

and debentures at will. In other words, a security cannot have a good

primary market unless it has an active secondary market.

The primary market comprises companies who make the security issues

and the general public who subscribe to them. The primary market is

where a company in search of capital, markets its first contact whit the

general public. Therefore, if one is wondering whether or not to invest in

22


the new issues of a company, one is basically contemplating whether or

not to participate in the primary market.

The secondary market comprises buyers and sellers of shares and

debentures subsequent to the original issue. For example, having

subscribed to the share or debenture of a company, if one then wishes to

sell this, it will be done in the secondary market. Similarly, one can also

buy the share or debenture of a company from the secondary market (if

the company listed in the stock exchange), without having to wait for that

company to come out with a new public issue. Thus, by their very role,

stock exchanges are an important constituent of the capital market.

The two markets mentioned above are not two physically segregated

institutions. Often the same parties may be involved in both the markets.

Primary market merely alludes to the first purchase of a new share or

debenture by the public directly from the issuing company, whereas

secondary market refers to the subsequent trading in those shares and

debentures. A stock exchange is the single most important institution in

the secondary market for securities.

23


Chapter 3

Secondary Stock Market

Introduction

The term secondary stock market means the place where the actual trading of

stocks takes place. In the secondary stock market an investor buys a stock from

another investor instead of any particular issuing entity. The New York Stock

Exchange is a good example of a secondary stock market.

Secondary Stock Market Details

The companies apply for the membership of the specific stock market. The

companies are permitted to get into that stock markets after the successful

completion of their Initial Public Offerings. Once a company is registered in a

certain stock market, it means the stocks of the same are then available for

transaction. The listing price of the shares of a company in the secondary stock

market is fixed by the market regulator. In the secondary stock markets the

shares of the enlisted companies are traded at steady intervals.

Secondary Stock Market and Globalization

24


The phenomenon called globalization has had some impact on the various

secondary stock markets at present. The secondary stock markets across the

world have grown in keeping with the process known as globalization. The

advent of information technology has changed the way business is being

executed throughout the world. The secondary stock markets are also looking at

incorporating information technology into their business procedure. The

computers have contributed to the rise of more avenues of bringing up capital,

that could be used for a variety of purposes like increasing the size of the

company as well as making new investments. Information technology has also

helped the various secondary stock markets to conduct business with more

clarity and in a more smooth manner.

Role of stock exchanges in the development of the nation

It is no exaggeration to say that in a modern industrialist society, which

recognizes the rights of private ownership of capital, stock exchange is not

simply a convenience, they are essential. In fact, they are the markets which

exist to facilitate purchase and sale on securities of companies and the securities

or bonds issued by the government in the course of its borrowing operation. As

our country moves towards liberalization, this tendency is certain to be

strengthened. The task facing the stock exchange is to devise the means to reach

down to the masses, to draw the savings of the man in the street into productive

investments, to create conditions in which many millions of little investors in

cities, towns and villages will find it possible to make use of the facilities,

which have so far been limited to the privileged few. This calls for far-reaching

changes, institutional as well as operation.

Securities

25


Securities market is the market in which securities are bought and sold.

However, this is not related to a physical location. The term, securities market

loosely stands for the entire system in which financial securities or financial

instruments are traded, including the people and institutions involved in these

transactions, the organizations issuing or intending to issue the securities and

the systems that enable the trading processes. In short, it implies the entire

infrastructure required for transacting in securities, including the set of

regulatory bodies to ensure that the transactions are carried out in a fair and

transparent manner.

LISTING OF SECURITIES

Listing means admission of the securities to dealings on a recognized stock

exchange. The securities may be of any public limited company, Central or

State Government, quasi governmental and other financial

institutions/corporations, municipalities, etc.

The objectives of listing are mainly to:

provide liquidity to securities;

mobilize savings for economic development;

Protect interest of investors by ensuring full disclosures.

The Exchange has a separate Listing Department to grant approval for listing of

securities of companies in accordance with the provisions of the Securities

Contracts (Regulation) Act, 1956, Securities Contracts (Regulation) Rules,

1957, Companies Act 1956, Guidelines issued by SEBI and Rules, Bye-laws

and Regulations of the Exchange. A company intending to have its securities

listed on the Exchange has to comply with the listing requirements.

Over the Counter Exchange of India (OTCEI)

26


Introduction

The traditional trading mechanism prevailed in the Indian stock markets gave

way to many functional inefficiencies, such as, absence of liquidity, lack of

transparency, unduly long settlement periods and benami transactions, which

affected the small investors to a great extent. To provide improved services to

investors, the country's first ringless,scripless, electronic stock exchange -

OTCEI - was created in 1992 by country's premier financial institutions - Unit

Trust of India, Industrial Credit and Investment Corporation of India, Industrial

Development Bank of India, SBI Capital Markets, Industrial Finance

Corporation of India, General Insurance Corporation and its subsidiaries

and CanBank Financial Services.

Trading at OTCEI is done over the centres spread across the country. Securities

traded on the OTCEI are classified into:

Listed Securities - The shares and debentures of the companies listed on the

OTC can be bought or sold at any OTC counter all over the country and they

should not be listed anywhere else.

Permitted Securities - Certain shares and debentures listed on other

exchanges and units of mutual funds are allowed to be traded.

Initiated debentures - Any equity holding atleast one lakh debentures of

particular scrip can offer them for trading on the OTC.

OTC has a unique feature of trading compared to other traditional

exchanges. That is, certificates of listed securities and initiated debentures

are not traded at OTC.

27


The original certificate will be safely with the custodian. But, a counter

receipt is generated out at the counter which substitutes the share

certificate and is used for all transactions.

In the case of permitted securities, the system is similar to a traditional

stock exchange. The difference is that the delivery and payment

procedure will be completed within 14 days.

Compared to the traditional Exchanges, OTC Exchange network has the

following advantages:

OTCEI has widely dispersed trading mechanism across the country

which provides greater liquidity and lesser risk of intermediary

charges.

Greater transparency and accuracy of prices is obtained due to the

screen-based scrip less trading.

Since the exact price of the transaction is shown on the computer

screen, the investor gets to know the exact price at which s/he is

trading.

Faster settlement and transfer process compared to other

exchanges.

In the case of an OTC issue (new issue), the allotment procedure is

completed in a month and trading commences after a month of the

issue closure, whereas it takes a longer period for the same with

respect to other exchanges.

28


Thus, with the superior trading mechanism coupled with information

transparency investors are gradually becoming aware of the manifold

advantages of the OTCEI.

Stock market index

The movements of the prices in a market or section of a market are captured in

price indices called stock market indices, of which there are many, e.g., the

S&P, the FTSE and the Euronext indices. Such indices are usually market

capitalization weighted, with the weights reflecting the contribution of the stock

to the index. The constituents of the index are reviewed frequently to

include/exclude stocks in order to reflect the changing business environment.

Additionally, many choose to invest via the index method. In this method, one

holds a weighted or unweighted portfolio consisting of the entire stock market

or some segment of the stock market (such as the S&P 500 or Wilshire 5000).

The principal aim of this strategy is to maximize diversification, minimize taxes

from too frequent trading, and ride the general trend of the stock market.

DEMAT AND ONLINE TARDING

Origin of Demat in India

The concept of demat was introduced in Indian capital market in 1996 with the

setting up of NSDL. A depository holds securities in dematerialized form. It

maintains ownership records of securities in a book entry form and also effects

transfer of ownership through book entry. SEBI has introduced some degree of

compulsion in trading and settlement of securities in demat form while the

investors have a right to hold securities in either physical or demat form, SEBI

has mandated compulsory trading and settlement of securities in select

securities in dematerialized form. This was initially introduced for institutional

investors and was later extended to all investors. Starting with 12 script on15th

29

http://en.wikipedia.org/wiki/Wilshire_5000

http://en.wikipedia.org/wiki/S%26P_500

http://en.wikipedia.org/wiki/Index_fund

http://en.wikipedia.org/wiki/Market_capitalization

http://en.wikipedia.org/wiki/Market_capitalization

http://en.wikipedia.org/wiki/Euronext

http://en.wikipedia.org/wiki/FTSE

http://en.wikipedia.org/wiki/Standard_%26_Poor's

http://en.wikipedia.org/wiki/Stock_market_index


Jan 1998, all investors are required to mandatory trade in dematerialized form in

respect of 2335 securities as at end-June 2001. By Nov, 2001. 3811 companies

were under demit mode and the rest of the companies were brought under

compulsory demat mode by 2nd Jan. 2002. The securities of companies which

fail to establish connectivity with both the depositories on the scheduled date as

announced by SEBI are traded on the “trade for trade” settlement window of the

exchanges. However in order to mitigate the difficulties of small investors the

stock exchanges provide additional windows for sales up to 500 shares in the

physical form.

Benefits of demat

Elimination of bad deliveries

Elimination of all risks associated with physical certification.

NO stamp duty.

Immediate transfer and registration of securities.

Faster settlement cycle.

Faster disbursement of rights, bonus etc.

Reduction in brokerage by many brokers for trading in dematerialized

securities.

Reduction in handling of huge volumes of paper and postal delays.

Dematerialization

Dematerialization (“Demat” in short form) signifies conversion of a share

certificate from its physical form to electronic form for the same number of

30


holding which is credited to your demat account which you open with a

Depository Participant (DP)Depository. A Depository (NSDL & CDSL) is

an organization like a Central Bank where the securities of a shareholder

are held in the electronic form at the request of the shareholder through the

medium of a Depository Participant. If an investor wants to utilize the

services offered by a Depository, the investor has to open an account with

the Depository through a Depository Participant. The Depository can legally

transfer beneficial ownership which a custodian cannot. The main objective

of a Depository is to minimize the paper work involved with the ownership,

trading and transfer of securities.

Depository Participant

Similar to the brokers who trade on your behalf in and outside the Stock

Exchange; a Depository Participant (DP) is your representative (agent) in the

depository system providing the link between the Company and you through the

Depository. Your Depository Participant will maintain your securities account

balances and intimate to you the status of your holding from time to time.

According to SEBI guidelines, Financial Institutions like banks, custodians,

stockbrokers etc. can become participants in the depository. A DP is one with

whom you need to open an account to deal in electronic form. While the

Depository can be compared to a Bank, DP is like a branch of your bank

with which you can have an account.

How does the Depository System operate?

The Depository System functions very much like the banking system. A bank

holds funds in accounts whereas a Depository holds securities in accounts for its

clients. A Bank transfers funds between accounts whereas a Depository

transfers securities between accounts. In both systems, the transfer of funds

31


or securities happens without the actual handling of funds or securities. Both

the Banks and the Depository are accountable for the safe keeping of funds

and securities respectively

Safety to the investor

Securities Exchange Board of India (SEBI) has laid down certain rules

and regulations for getting registered as a depository participant. With the

recommendation of the Depository and SEBI's own independent

evaluation a DP will be registered under SEBI.

The investors account will be credited / debited by the DP only on the

basis of valid instruction from the client.

The system driven mandatory reconciliation is done between the DP and

NSDL.

Periodic inspections of both DP and R&T agent are conducted by NSDL.

The data interchange between NSDL and its business partners is

protected by standard protection measures such as encryption.

No direct communication links exist between two business partners and

all communications are routed through NSDL.

A statement of account is received periodically by the investors. NSDL

sends statement of account to a random sample of investors a s a counter

check.

The investor has the right to approach NSDL if the grievances of the

investors are not resolved by the concerned DP.

Advantages of dematerialization

32


There is no risk due to loss on account of fire, theft or mutilation.

There is no chance of bad delivery at the time of selling shares as there is

no signature mismatch.

Transaction costs are usually lower than that in the physical segment.

The bonus /rights shares allotted to the investor will be immediately

credited into his account. Share transactions like sale or purchase and

transfer/transmission etc. can be effected in a much simpler and faster

way.

Problems of Dematerialisation.

Prior to dematerialization there was almost a gap of three months between

application date and listing of shares .Dematerialisation has reduced this gap to

a great extent. But quick money brings with itself a host of problems. Current

regulations prohibit multiple bids or applications by a single person. But the

investors open multiple demat accounts and make multiple applications to

subscribe to IPO's in the hope of getting allotment. The recent IPO allotment

scam proves that even a highly automated system is not the solution to prevent

malpractices, if there is laxity. The scam of Yes bank and IDFC reveal that the

investor banker has failed to weed out multiple applications either direct or

benami. Not only the investor banker the DP and the depository failed to detect

the large number of demat accounts opened names. Lack of coordination

between banks, DP's, broker’s depositories, registrars and investment

bankers and clarity of their roles has given rise to such problems.

Remedial measures

To prevent the sprouting of fictitious demat accounts at DP's the

allotment of shares should be checked thoroughly.

33


The concerned DP should strictly enforce the Know your client (KYC)

norms rather than relying on bank documents and verification of

brokers.

DP's should be asked to give monthly figure of accounts opened for the

public.

Coordination and Clear definition of roles is important to weed out

manipulations.

Though dematerialization has several benefits the recent scam has the potential

to adversely affect the confidence of retail investors in the capital market .To

reap the benefits of dematerialization SEBI, as a regulator has to place a system

that is alert and vigilant against unjust gains

3.1] Stock Prices in Secondary Market

Introduction

The stock price in the secondary market is determined completely by the

fluctuations in demand and supply of the particular stocks. However the stock

prices in secondary market, of different types of shares are separate from each

other. The prices of stocks, that are liquid and are often traded in the secondary

markets, are liable to fluctuate throughout the entire duration of the transactions.

However, the investors can keep track of the changes in the prices through the

various trading screens.

Secondary Market Rate

The term secondary market rate means the price of the securities that are traded

in the secondary markets. There are various secondary markets which have

34


separate rates of their own. There are basically few predominant secondary

markets like the stock and bond markets.

Stock Market Rates:

The stock market rates are the prices of transaction in the stock markets. There

are primarily three different stock market rates or prices - the opening price, the

closing price and the listing price. The opening price is the one at which trading

starts for the day.

The closing price of a stock is the one at which the trading stops for the

particular day. The closing price also serves as the opening price for the coming

trading day. The listing price of a particular stock is determined by the market

regulator, along with the respective market, where the stock would be traded.

Commercial bank debts of developing countries are held by large international

banks and smaller domestic banks. This paper investigates how debt

concentration--the proportion of a country's debt held by large banks relative to

small banks--affects the secondary market price for these loans. We find that

countries with higher concentrations have higher secondary-market prices.

We explain this empirical finding in a bargaining model that endogenizes the

maximum penalty that banks can credibly impose on a recalcitrant debtor. We

show that the banks' bargaining power increases with the degree of debt

concentration, thus increasing repayment and secondary-market prices.

Copyright 1999 by Economics Department of the University of Pennsylvania

and the Osaka University Institute of Social and Economic Research

Association.

3.2] Secondary market for loans

It is commonly argued that banks play a special role in the financial system

because they resolve an important information asymmetry. The recent

35


development of an active secondary market for loans could however potentially

diminish this special role. This study utilizes a unique dataset of secondary

market loan prices to examine this issue. We find that new loan announcements

are associated with a positive stock price announcement effect even when a

borrower’s loans trade on the secondary market. This result also holds true for

distressed borrowers who are ex ante expected to be most adversely affected by

a potential reduction in bank incentives to monitor as a result of a secondary

market for loans. Moreover, when a borrower’s existing loans trade for the first

time in the secondary loan market, it elicits a positive stock price response.

Overall, our results suggest that banks continue to be special in the presence of

a secondary market for bank loans, and that the bank monitoring function and

the secondary market for bank loans are complementary sources of information

about borrowers.

36


Bank Loan Sales: A New Look at the Motivations for Secondary Market

Activity

Bank lending traditionally involves the extension of credit that is held by the

originating bank until maturity. Loan sales allow banks to deviate from this

pattern by transferring loans in part or in their entirety from their own books to

those of another institution. This paper uses a new methodology to test the

validity of two hypotheses regarding banks' motivations for selling and buying

loans: (1) the comparative advantage hypothesis, that banks with a

comparative advantage in originating loans sell and those with a comparative

advantage in funding loans buy, and (2) the diversification hypothesis, that

banks lacking the ability to diversify internally use loan sales and purchases to

achieve diversification. A third hypothesis--that reputation barriers can limit

access to the secondary market--is considered as well, with particular attention

paid to the importance of affiliate relationships in explaining secondary market

activity. Together, the evidence relating to these three hypotheses helps clarify

the benefits of an active secondary loan market. It also generates predictions

regarding the future of that market in a world of rapid consolidation and

disappearing barriers to geographical expansion.

3.3] BOMBAY STOCK EXCHANGE

INTRODUCTON:

The Bombay Stock Exchange is the oldest Stock Exchange in Asia located in

Dalal Street, Mumbai in India.

Evolution of the Bombay Stock Exchange and its Size

The Bombay Stock Exchange was established in 1875 as the “Native Share and

Stock Brokers Association” in 1875. It earned a formal status under the

37


Securities and Exchange Board of India (SEBI) in 1956. Market Capitalization

of the BSE was about Rs 33.4 trillion as on 2006, October. The Bombay Stock

Exchange uses the Bombay Stock Exchange Sensex as the market index in Asia

and India.

The Bombay Stock Exchange deals with trading in derivatives, equity and other

debt instruments.

BSE Management

Bombay Stock Exchange is managed professionally by Board of Directors. It

comprises of eminent professionals, representatives of Trading Members and

the Managing Director. The Board is an inclusive one and is shaped to benefit

from the market intermediaries participation. The Board exercises complete

control and formulates larger policy issues. The day-to-day operation of BSE is

managed by the Managing Director and its school of professional as a

management team.

BSE Network

The Exchange reaches physically to 417 cities and towns in the country. The

framework of it has been designed to safeguard market integrity and to operate

with transparency. It provides an efficient market for the trading in equity, debt

instruments and derivatives. Its online trading system, poularly known as

BOLT, is a proprietory system and it is BS 7799-2-2002 certified. The BOLT

network was expanded, nationwide, in 1997. The surveillance and clearing &

settlement functions of the Exchange are ISO 9001:2000 certified

Organization structure

In terms of organization structure, the board formulates larger policy issues and

exercises overall control. The committees constituted by the board are broad-

38


based. The day-to-day operations of the exchange are managed by the managing

director and a management team of professionals

Sensex

Sensex is the value-weighted index of the companies listed on the stock

exchange. Bombay Stock Exchange (BSE) in 1986 came out with a stock index

that subsequently became the barometer of the Indian stock market.

BSE DEBT SEGMENT

Introduction

The capital market comprises of equities market and debt market. Debt market

is a market for the issuance, trading and settlement in fixed income securities of

various types. Fixed income securities can be issued by a wide range of

organizations including the Central and State Governments, public bodies,

statutory corporations, banks and institutions and corporate bodies

Transformations in the Market Structure. The Indian Debt Markets are

today poised on the threshold of momentous change and transition to an

efficient, transparent and vibrant market with significant retail participation.

The first half of the twentieth century had witnessed a significant amount of

retail interest and participation in the G-Sec market with more than half the

holdings of G-Secs issued being held by retail investors, a trend which

continued until the early sixties. The administered interest rate regime and the

emergence of other equity and debt instruments led to a gradual diminution in

the investor interest and participation in the G-Sec market. The Indian Debt

Market structure was hitherto that of a wholesale market with participation

largely restricted to the Banks, Institutions and the Primary Dealers. The rapidly

expanding volumes in the Wholesale Debt Market over the past few years bear

the promise of an immense and attractive financial market with a strong

39

http://www.iloveindia.com/finance/bse/sensex.html


potential for retail participation. The Retail Debt Market in India is being

created, thanks to the pioneering efforts of the Exchanges and the market

participants and the strong leadership and guidance by SEBI, RBI and the

Govt. of India.SEBI has subsequently taken several steps towards creation of a

vibrant Corporate Bond market. On July 2, 2007 SEBI permitted BSE to launch

a trade matching platform with essential features of an OTC Market. Several

other initiatives like simplification of the Debt listing agreement, rationalization

of stamp duty and introduction of Repos on Corporate Bonds have been taken

by SEBI.

BSE’s Bond with Investors

Bombay Stock Exchange Limited (BSE), the premier stock exchange in the

country, has heralded the capital market revolution in India and has contributed

immensely towards the achievement of global standards of efficiency and safety

by the Indian capitals market.BSE, with its rich experience of 133 years in the

Indian capital market, offers investors an efficient and transparent nation-wide

platform for trading in Equities, Debt and Derivative products. BSE is now in

the throes of change, having transformed itself into a corporate entity effective

August 19, 2005, and several significant initiatives are in the offing

permitted banks, Primary Dealers and financial institutions in India to

undertake transactions in debt instruments among themselves or with non-bank

clients through the members of Bombay Stock Exchange Limited (BSE). This

notification paved the way for BSE to commence trading in Government

Securities and other fixed income instruments.

3.4] National stock exchange

Introduction

40


The National Stock Exchange of India Limited (NSE), is a Mumbai-based

stock exchange. It is the largest stock exchange in India in terms of daily

turnover and number of trades, for both equities and derivative trading. NSE has

a market capitalization of around Rs 47,01,923 crore (7 August 2009) and is

expected to become the biggest stock exchange in India in terms of market

capitalization by 2009 end. Though a number of other exchanges exist, NSE and

the Bombay Stock Exchange are the two most significant stock exchanges in

India, and between them are responsible for the vast majority of share

transactions. The NSE's key index is the S&P CNX Nifty, known as the Nifty,

an index of fifty major stocks weighted by market capitalisation.

NSE is mutually-owned by a set of leading financial institutions, banks,

insurance companies and other financial intermediaries in India but its

ownership and management operate as separate entities.

NSE was set up with the objectives of:

Establishing nationwide trading facility for all types of securities

Ensuring equal access to investors all over the country through an

appropriate telecommunication network

Providing fair, efficient & transparent securities market using electronic

trading system

Enabling shorter settlement cycles and book entry settlements

Meeting International benchmarks and standards

Within a very short span of time, NSE has been able to achieve its objectives for

which it was set up. Indian Capital Markets are a far cry from what they were

12 years back in terms of market practices, infrastructure, technology, risk

management, clearing and settlement and investor service. To ensure continuity

41

http://en.wikipedia.org/wiki/S%26P_CNX_Nifty

http://en.wikipedia.org/wiki/Bombay_Stock_Exchange

http://en.wikipedia.org/wiki/Indian_rupee

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/Stock_exchange

http://en.wikipedia.org/wiki/Mumbai


of business, NSE has built a full fledged BCP site operational for last 7 years.

NSE has several advantages over the traditional trading exchanges. They are as

follows:

NSE brings an integrated stock market trading network across the nation.

Investors can trade at the same price from anywhere in the country since

inter-market operations are streamlined coupled with the countrywide

access to the securities.

Delays in communication, late payments and the malpractice’s prevailing

in the traditional trading mechanism can be done away with greater

operational efficiency and informational transparency in the stock market

operations, with the support of total computerized network.

The following diagram shows the trend in the no. of listed companies

participating in the Indian Capital Market. Here again we register a sharp rise

after 1980. The number of stocks issued by the listed companies also shows a

similar trend.

42


In order to lift the Indian stock market trading system on particular with the

international standards. On the basis of the recommendations of high powered

Pherwani Committee, the National Stock Exchange was incorporated in 1992

by Industrial Development Bank of India, Industrial Credit and Investment

Corporation of India, Industrial Finance Corporation of India, all

Insurance Corporations, selected commercial banks and others.

Membership

The National Stock Exchange has set up facilities which serve as a model for

the securities industry in terms of trading systems, practices and procedures.

Though the impetus for its establishment came from policy makers in the

country, it has been set up as a public limited company, owned by the leading

institutional investors in the country. NSE is different from most Stock

Exchanges in India where membership on an exchange also meant ownership of

the exchange. The ownership and management of the Exchange is completely

separated from the right to trading members, to trade on the NSE. The

Exchange is managed by a Board of Directors. Decisions relating to market

operations are delegated by the Board to an Executive Committee which

includes representatives from the Trading Members, the public and the

management. Besides, the Exchange operates various committees to advise it on

areas such as good market practices, settlement procedures, risk containment

systems etc. These committees are manned by industry professionals, Trading

Members and Exchange staff. The day to day management of the Exchange is

delegated to the Managing Director who is supported by a team of professional

staff.(i) 1026 trading members on the Capital Market segment, of which around

43


86% account for corporates and the remaining individuals and firms.(ii) 113

trading members on the Wholesale Debt Market segment, all of which account

for corporates. (Out of these 113 trading members, 106 are members of the

Capital Market segment also and are included in the 1026 members).

Business

At NSE three kinds of margins are imposed i.e. daily margins, margins which

depend on market fluctuations which are adjusted against the exposure of the

member. It has three mutually exclusive segments comprising of wholesale debt

market, capital market and futures and options trading. Debt market was

activated in early 1994 and the share trading on 03.11.1994.The NSE eliminated

the physical trading floor by going in for automated fully screen-based trading

system. The trading system has the advantages of ensuring best price to market

participants, lead higher growth in volumes through automation, increased

efficiency and greater flexibility in money management. Effective monitoring

mechanism, quick and efficient settlements with its trading members spread

across the country, the NSE managed to access hitherto removed markets. At

NSE traders are automatically matches i.e. a buy order is matched with a sale

order.

S&P CNX nifty index

The index popularly called the nifty reflects the price movement of 50 stocks

selected on criteria of market capitalization and liquidity, in the national stock

exchange. The index is well diversified with 23 industries finding

representation. The index has been in operation since Nov.05, 1955, the base

period for nifty is the close price on NOV.03.1995, the date on which NSE

capital market segment completed one year of operation. The index is owned

and operated by Indian index services and products Ltd; a company set up by

44


NSE and CRISIL with technical assistance from standard and Poor’s. The index

touched its peak of 1756 on February 11, 2000.

S&P CNX NIFTY 28TH AUG., 2009

COMPANY

NANE

INDUSTRY LAST

PRICE

CHARGE %CHARGE MARKET

CAPITAL

WEIGHT

AXIS BANK BANKS-

PRIVATE

SECTOR

918.85 -3.90 -0.42 33066.72 1.11

HDFC FINANCE-

HOUSING

2511.15 9.90 0.40 71457.37 2.40

HDFC BANK BANKS-

PRIVATE

SECTOR

1457.75 0.75 0.05 62010.37 2.08

ICICI BANK BANKS

PRIVATE

SECTOR

763.60 13.05 1.74 85013.43 2.86

PNB BANKS-

PULIC

SECTOR

678.40 16.20 2.45 21390.12 0.72

SBI BANK-

PUBLIC

1781.75 27.95 1.59 113119.78 3.80

Difference between BSE and NSE

Bombay Stock Exchange and National Stock Exchange are both major stock

exchange in India. But there is a difference between NSE and BSE. Investors

put their money in the stock market in order to reap huge benefits from their

investment. But nobody can predict the market as we have already discussed.

Also any stock market is decided by its country’s growth. But you should be

45


aware that it requires a lot of patience. The market tumbles down and this is the

reason why investors fear of investing their money.

Chapter 4

4.1] Secondary Market Trading

Introduction

The term secondary market trading signifies the buying and selling of securities,

after they have been brought out through an Initial Public Offering. In order for

secondary market trading to take place a particular security has to be listed in

the relevant exchange. The term secondary market trading could also be denoted

to the dealing of the smaller parts of a larger loan and ownership interest in

business enterprises.

Nature of Secondary Market

In the secondary markets the securities are traded by investors. The secondary

markets need to have higher levels of liquidity so that transaction could be

carried on properly.

Benefits of Secondary Market Trading

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There are various benefits of trading in the secondary markets. The biggest

advantage is that the investors can recover their investments to a certain extent,

provided their economic status undergoes a change. This is different from the

conventional lending and partnership agreements. In such cases the investors

may refrain from making long term investments. Even if they invest for a longer

period of time, they would charge higher rates of interest for it. In the secondary

markets the investors are provided the luxury of being able to sell their interests

in the respective investments. This is specifically applicable if the particular

investment has been fragmented in comparatively smaller parts. The investors

are provided such luxuries in case of the securitized loans, equity interests like

bonds or stocks that could be traded.

Private equity secondary market

In finance, the private equity secondary market (also often called private equity

secondaries or secondaries) refers to the buying and selling of pre-existing

investor commitments to private equity and other alternative investment funds.

Sellers of private equity investments sell not only the investments in the fund

but also their remaining unfunded commitments to the funds. By its nature, the

private equity asset class is illiquid, intended to be a long-term investment for

buy-and-hold investors. For the vast majority of private equity investments,

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there is no listed public market; however there is a robust and maturing

secondary market available for sellers of private equity assets.

Driven by strong demand for private equity exposure, a significant amount of

capital has been committed to dedicated secondary market funds from investors

looking to increase and diversify their private equity exposure.

History of private equity and venture capital

Many of the largest financial institutions (e.g., Deutsche Bank, Abbey

National, UBS AG) sold portfolios of direct investments and “pay-to-play”

funds portfolios that were typically used as a means to gain entry to

lucrative leveraged finance and mergers and acquisitions assignments but

had created hundreds of millions of dollars of losses.

Bank-sponsored PE, VC funds face capital adequacy norms

In a move that could affect private equity (PE) and venture capital (VC) funds

being set up by banks, the Reserve Bank of India (RBI) today said it was

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planning to lay down a risk management and capital adequacy framework for

bank-sponsored private pools of capital.

The move, a part of the new set of prudential norms being discussed by

financial sector regulators across the globe in the wake of the credit crisis, was

being discussed in view of the reputation risk arising from undertaking such

activities, RBI said in its annual report for 2008-09.

Laying emphasis on the macro-prudential dimension of the systemic risk

assessment, the banking regulator said it was also in the process of revising the

guidelines on stress testing and liquidity risk management and would factor in

the new guidance issued by the Basel Committee on Banking Supervision in

March. Indian banks had not shown any strain during the stress test conducted

by RBI.

While banks such as ICICI Bank and Axis Bank are already in the private

equity arena, others such as State Bank of India and Yes Bank are looking to

launch such funds. While RBI had initially expressed certain concerns about

State Bank of India’s entry into the private equity-venture capital space, it asked

the country’s largest banks to initiate certain steps before foraying into the

business. Canara Bank also has a venture capital fund.

If RBI goes ahead with the move, banks would have to factor in the capital they

might have to set aside to cover the risk of VC and PE funds promoted by them.

In recent years, the regulator has laid emphasis on initiatives such as

consolidated supervision of banking groups. And with Indian financial players

venturing outside the country, steps are also being taken to strengthen cross-

border supervision.

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RBI said elements of macro-prudential regulation were visible in India even

before the global crisis started. The central bank had started using counter-

cyclical risk weights and provisioning norms, such as those for bank loans to the

real estate sector, to ensure that the risk was contained. In light of the global

financial turmoil, the global initiative would focus on a multi-pronged approach

that would focus on introduction of automatic stabilisers by adopting counter-

cyclical capital charge. This would help build a cushion during boom years to

deal with asset-quality issues in a downturn.

Further, RBI said that in the coming days, regulators could focus on elements

such as offbalance sheet exposure, risk concentration and valuation of financial

instruments, among others, to strengthen supervision. In addition, they could

promote market discipline through better disclosure and clarity on risks

associated with certain instruments.

RBI said regulators could provide capital requirements for reputational and

other risk-associated securitisation and activities undertaken by sponsored or

connected conduits. Another element that can be used is stipulating capital

treatment for trading book exposures, besides supplementing the regulatory

approach to minimize the incentive for regulatory arbitrage between banking

and trading books.

4.2] Secondary Market Liquidity

Introduction

The term secondary market liquidity is primarily used in the fields of business,

investment or economics. The term secondary market liquidity is used to mean

the quality of a security to be transferred at the least possible loss of value and

least possible price change. The speculators and the market makers are

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important in the context of determining the liquidity of a secondary market.

They are responsible for providing the capital that helps to bring about liquidity.

Secondary Market Securities' Liquidity

The securities that are traded in the secondary markets and have a certain degree

of liquidity possess some characteristics. They may be enumerated as below:

They can be sold quickly

They can be sold at anytime within the trading hours

They can be sold with the minimum loss of value

LIGUIDITY (IN BANKS)

In banking, liquidity is the ability to meet obligations when they come due

without incurring unacceptable losses. Managing liquidity is a daily process

requiring bankers to monitor and project cash flows to ensure adequate liquidity

is maintained. Maintaining a balance between short-term assets and short-term

liabilities is critical. For an individual bank, clients' deposits are its primary

liabilities (in the sense that the bank is meant to give back all client deposits on

demand), whereas reserves and loans are its primary assets (in the sense that

these loans are owed to the bank, not by the bank). The investment portfolio

represents a smaller portion of assets, and serves as the primary source of

liquidity. Investment securities can be liquidated to satisfy deposit withdrawals

and increased loan demand. Banks have several additional options for

generating liquidity, such as selling loans, borrowing from other banks,

borrowing from a central bank, such as the US Federal Reserve bank, and

raising additional capital. In a worst case scenario, depositors may demand their

funds when the bank is unable to generate adequate cash without incurring

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substantial financial losses. In severe cases, this may result in a bank run. Most

banks are subject to legally-mandated reserve requirements intended to help

banks avoid a liquidity crisis.

Banks can generally maintain as much liquidity as desired because bank

deposits are insured by governments in most developed countries. A lack of

liquidity can be remedied by raising deposit rates and effectively marketing

deposit products. However, an important measure of a bank's value and success

is the cost of liquidity. A bank can attract significant liquid funds, but at what

cost? Lower costs generate stronger profits, more stability, and more confidence

among depositors, investors, and regulators.The secondary market was

underdeveloped and lacked liquidity. Several measures have been initiated and

include new money market instruments, strengthening of existing instruments

and setting up of the Discount and Finance House of India (DFHI). The RBI

conducts its sales of dated securities and treasury bills through its open market

operations (OMO) window. Primary dealers bid for these securities and also

trade in them. The DFHI is the principal agency for developing a secondary

market for money market instruments and Government of India treasury bills.

The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity

is injected through reverse repo auctions and liquidity is sucked out through

repo auctions. On account of the substantial issue of government debt, the gilt-

edged market occupies an important position in the financial set- up. The

Securities Trading Corporation of India (STCI), which started operations in

June 1994, has a mandate to develop the secondary market in government

securities.

4.3] Treasury Bills Secondary Market

Introduction

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The term treasury bills secondary market refers to the place where the actual

transactions occur. In this particular market, treasury bills are traded based on a

certain percentage yield. This yield is obtained after a treasury bill matures.

Treasury Direct

The Treasury Direct enables buyers of these types of securities to purchase

treasury bills through the Internet. They can have the funds taken out and

subsequently deposited directly into the bank accounts of respective buyers.

Treasury Bill Rates

The maturity period for the treasury bills in the United States is not more than a

year. There are other treasury bills available as well. Those treasury bills have

maturity periods of one, three or six months. The minimum worth of a treasury

bill is a thousand US dollars. The maximum price of a treasury bill is five

million

Treasury Bills in USA

In the United States, treasury bills are issued by the Treasury Department

through the Public Department Bureau. The mechanism of these bills is utilized

by the United States government during the time it conducts open market

operations. The maximum maturity period for treasury bills is one year,

however, bills may be issued for a one, three, or six month period. The price of

a bill ranges from one thousand to five million US dollars.

Treasury Bills India:

Treasury Bills are short term (up to one year) borrowing instruments of the

Government of India which enable investors to park their short term surplus

funds while reducing their market risk.

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They are auctioned by Reserve Bank of India at regular intervals and issued at

a discount to face value. On maturity the face value is paid to the holder.

The rate of discount and the corresponding issue prices are determined at each

auction. When liquidity is tight in the economy, returns on Treasury Bills

sometimes become even higher than returns on bank deposits of similar

maturity. Any person in India including Individuals, Firms, Companies,

Corporate bodies, Trusts and Institutions can purchase Treasury Bills. Treasury

Bills are eligible securities for SLR purposes.

Treasury Bills are available for a minimum amount of Rs.25,000 and in

multiples of Rs. 25,000 thereafter. They are available in both Primary and

Secondary market. Treasury Bills are issued in the form of SGL - entries in

the books of Reserve Bank of India to hold the securities on behalf of the

holder. The SGL holdings can be transferred by issuing a SGL transfer

form. Recently Treasury Bills are also being issued frequently under the

Market Stabilization Scheme (MSS).

Type of Treasury Bills:

At present, RBI issues T-Bills for three different maturities: 91 days, 182 days

and 364 days. The 91 day T-Bills are issued on weekly auction basis while 182

day T-Bill auction is held on Wednesday preceding non-reporting Friday and

364 day T-Bill auction on Wednesday preceding the reporting Friday

Advantages of investing in Treasury Bills:

No Tax Deducted at Source (TDS).

Zero default risk as these are the liabilities of GOI.

Liquid money Market Instrument.

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Active secondary market thereby enabling holder to meet immediate fund

requirement.

SBI DFHI Ltd, is an active player in the both the primary and the secondary

market for Treasury Bills with an impressive turnover of Rs.5428 crores.

Chapter 5

5.1] Secondary Bond Market

Introduction:

The bond market (also known as the debt, credit, or fixed income market) is

a financial market where participants buy and sell debt securities

Bond Market Rates

There are two different types of bonds in the market as per the rates - the fixed

rate bonds and the floating rate bonds. In the fixed rate bonds the interest rate

stays the same. It never changes throughout the entire term period of the bond.

The interest rate of the floating rate bonds are determined by a money market

index. In the floating rate bonds a spread is grouped together with the rates of

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the governmental funds. The spread stays the same throughout the term period

of the bonds. The interest on the floating rate bonds are normally paid after

every three months. There are certain bonds like the zero coupon bonds, which

do not require the payment of interest.

SBI DFHI Ltd. is an active participant in the Bond Market. Through SBI

DFHI Invest Plus, investors can purchase investment grade Corporate

Bonds for their purposes.

How to Buy or Sell It?

Corporate bonds can be bought through a full service or discount broker, a

commercial bank or other financial intermediaries. The best time to buy a

corporate bond is when interest rates are relatively high.The central bank sells

treasury bills and bonds to meet short-term borrowing needs of the government.

The mature periods for such bill are 28-day, 91-day, 182-day and 364-day. The

treasury bonds are sold to meet budget deficit and long-term government

financing. The mature periods are five years, 10 years, 15 years and 20 years.

The central bank holds auction for treasury bonds every week and anybody can

bid for it through any bank. The auction committee fixes bond interest rate and

it is applicable throughout the bond's life. This means that buyers will get

interest payment at the rates fixed by the committee. Any individual is allowed

to buy government bond, which pays interest or coupon after every six months

and it is of Tk 0.1 million denominations or its multiplier, from the primary or

secondary market through any bank. There is a secondary market for sale and

purchase of bonds. Yet this market has not been functioning properly since its

inception in 2005, depriving the capital market of the gains and benefits

expected from it. Since its inception at the Dhaka bourse, there had been

negligible transactions at the secondary market. IBBL Mudaraba Perpetual

Bond, the only one corporate bond issued by Islamic Bangladesh Bank Limited

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(IBBL), however, showed some good performance. No capital market can reach

maturity without a strong bond market. Once the government bond market

becomes vibrant, only then the private sector bond market grows.

PSU Bonds/Corporate Debentures

Since these securities are yet to be dematerialized, problems relating to

physical settlement and non-standardized settlement practices persist.

These include problems of directors’ signatures, banker’s attestation of

signatures, separate resolution for selling and buying, insistence on

rubber stamp of issuer company or transfer agents for previous transfers,

etc.

Banks are allowed to buy these securities only from registered holders

and not if these are in “street names”. Transfer of bonds and debentures is

further constrained due to some sellers insisting on endorsing the

instruments specifically in favour of the buyer.

Finally, the status on purchase of bonds/debentures by way of Letter of

Allotment by banks is not clear, again hampering transfer.

Canara Bank raises Rs 600 cr via bonds issue

Mumbai: State-run lender Canara Bank has raised Rs 600 crore by issuing

bonds.

In a filing to the Bombay Stock Exchange, the bank said, "we have collected

total issue amount of Rs 600 crore under the said issue." Last week the bank had

said it would raise Rs 400 crore by issuing non-convertible subordinate

perpetual Tier-I bonds with an additional option to raise another Rs 200 crore, if

the issue is fully subscribed.

The bonds are with a coupon rate of 9.10 per cent per annum for the first 10

years. The issue, which opened on August 18, closed on August 21, 2009.

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Shares of Canara Bank were trading at Rs 265.75, up 1.47 per cent in the late

afternoon trade on the BSE.

5.2] Secondary Debt Market Investors

Introduction

For a developing economy like India, debt markets are a crucial source of funds.

The debt market in India is amongst the largest in Asia. It includes government

securities – the largest component - and bonds issued by public sector

undertakings, other government bodies, financial institutions, banks and

companies. Debt markets are now considered an alternative route to banking

channels for finance.

Debt Instruments are obligations of issuer of such instruments as regards certain

future cash flows representing Interest & Principal, which the issuer would pay

to the legal owner of the Instruments. Generally debt instruments represent

agreements to receive certain cash flows as per the terms contained within the

agreement. They can also be said to be tradable form of loans. Bond market

investors are also a type of secondary debt market investors when they

trade in the secondary market. A through study of the secondary bond

market must be done before investing. Investing in municipal securities can

be a very lucrative option. Bonds can be broken before they mature. Secondary

market investors have their share of advantages and disadvantages. The

investors must use their prudence and experience.

Some of the benefits to the investors in debt instruments are:

The investors benefit by investing in fixed income securities as they

preserve and increase their invested capital and also ensure the receipt of

regular interest income.

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The investors can even neutralize the default risk on their investments by

investing in Govt. securities, which are normally referred to as risk-free

investments due to the sovereign guarantee on these instruments.

The prices of Debt securities display a lower average volatility as

compared to the prices of other financial securities and ensure the greater

safety of accompanying investments.

Debt securities enable wide-based and efficient portfolio diversification

and thus assist in portfolio risk-mitigation.

Almost all debt instruments have a rating assigned to them by a Rating Agency

which enables the investor to choose his degree of risk and corresponding

returns.

The Impact of the debt market on the economy

The Asian financial crisis in the 1990s stressed the importance of a fully active

debt market; the lack of which aggravated the crisis. For a developing economy

like India, debt markets are crucial sources of capital funds. The debt market

in India is amongst the largest in Asia. It includes government securities,

public sector undertakings, other government bodies, financial institutions,

banks and companies. Reduced role of banks and political intervention in

use of funds, as banks have to follow norms laid down by the central bank

12.4] DEBT IN BANKS.

Governments raise monetary resources by way of public borrowings to bridge

the gap between budgetary receipts and payments, technically known as Gross

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Fiscal Deficit (GFD). In fact, GFD of the Central government is met broadly

from three sources- public borrowings or internal debt, other liabilities and

external borrowings. Reserve Bank of India has the statutory obligation to

manage the internal debt (public debt) of the Central government while its

obligation to manage the internal debt (public debt) of State Governments arises

from bilateral agreements between the Bank and the respective State

Governments.

Management of public debt by the RBI involves various policy considerations,

which include optimisation of cost of borrowing, achieving dispersion of

ownership of government securities down to the retail level and fostering a deep

and vibrant market for government securities. Demand for credit from

productive sectors and other events such as foreign funds flows and monetary

policy actions can impact the liquidity conditions in the market. The Reserve

Bank has specialized knowledge about the market conditions and, therefore, is

in a position to advise the Governments about the appropriate timing of debt

issuance.

The Indian debt market is dominated by government securities both in terms of

outstanding stock as well as turnover. Till recently, the public sector assumed a

pre dominant role in the development process. Large statutory pre-emption and

borrowing from the RBI provided the government the ability to meet its

borrowing requirements to finance large fiscal deficits. While the rates of

interest on government debt were administered, central bank financing was

extended at much below market interest rates. The monetary policy had to be

compensatory in nature and in the main required successive and large increases

in cash reserve and statutory liquidity requirements.

Till 1993-94 the Central Government was by and large financing its deficits

through a process of larger pre-emption from the banking system and other

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captive borrowers besides taking recourse to central bank finance through

automatic monetisation. The voluntary agreement between the Government of

India and the Reserve Bank of India to phase out the automatic monetisation

was a path-breaking move in the reform process. Consequently, the system of

automatic monetisation ended on March 31, 1997. Government of India's

willingness to borrow from the markets at market rates along with the decision

to introduce auction system for sale of government loans paved the way for

developing a sovereign benchmark yield curve and thus helped the price

discovery in the government and non-government debt market.

Government securities market in India has thus passed through different stages

reflecting the developments in the financial sector from time to time. As the

interest rates for banks were being administered by the Reserve Bank of India,

the interest rate on government securities (known as Coupon Rate) were also

administered and did not reflect the consensus of financial market, which in any

case, was not well developed. This had resulted in coupon rates being low as

compared to interest rates on other assets such as loans. The market for

government securities, as a result, did not develop and mature to be in a position

to discover prices of government securities at the primary issue stage or in the

secondary market.

Financial sector reforms initiated in the year 1992 provided an impetus to RBI's

efforts to bring about debt market reforms. To start with, in June 1992 auction

system for issue of government securities was introduced. Thus from being

viewed as an instrument of mobilisation of plan resources for government

during the first four decades of independence, internal debt management was

transformed into a market driven activity requiring development of pricing and

trading skills, institutional and market infrastructure with the necessary legal

and technological back-up.

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Problems by Investor

1] Retail investors can be best understood by first examining their principal

needs viz. safety, liquidity, yield and ease of operation. The one instrument

which meets all these requirements is a bank deposit. The fact that up to

Rs.1,00,000 of a bank deposit is insured with DICGC, imparts it with additional

safety.

Retail investors have low interest in Government securities due to

settlement related problems as well as the lack of direct or indirect access

to the electronic clearing and settlement system at the RBI. But the most

important reason which keeps retail investors away from the gilts market

is lack of awareness regarding the yields prevailing in Government

securities and the procedures for investment. As a result, while yields on

T-bills for the first half of 1996 were consistently higher than those

offered by bank deposits, they did not elicit any retail interest.

At most times however, yields on Government securities are lower than

those on other available investment options due to higher liquidity and

statutory demand from banks in the wholesale market. Low liquidity in

the retail secondary market for Government securities keeps retail

investors away from them.

After the crash of the equity markets, the traditional retail investor has

moved to bonds of PSUs and corporate debentures in a bid to get higher

yields and greater safety. However, he continues to be plagued by the

problems related to settlement, shallow secondary markets, relatively

lower safety than those offered by bank deposits or Government

securities and extremely cumbersome operational procedures. To invest

in debentures, he still needs to find a broker, take delivery, make

payment, affix transfer stamps, lodge for transfer, follow up with Issuer

Company and collect interest payment. In addition, he has to repeat much

of this process at the time of sale.

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Larger players, particularly banks, have been reluctant to market debt

instruments to retail investors, under the apprehension of creating an

adverse impact on their own deposits.

Finally, the absence of market makers, and hence liquidity in the

secondary market, further dampens retail interest.

2] Wholesale investors include banks, insurance companies, mutual funds,

financial institutions and FIIs.

Since the secondary market is dominated by banks, most of the problems

enumerated, relate primarily to banks. Some of these problems are

attitudinal:

Treasury is considered a compliance centre instead of a profit centre in

most public sector banks.

The shadow of the securities scam continues to hinder active trading not

only in public sector banks but also in several private sector and foreign

banks. Trading limits are not delegated to the dealer level but continue to

vest with levels as high as general and deputy general managers. These

managers also bear varied other responsibilities, and are in no way

equipped to trade in the secondary market.

A number of public sector banks do not yet have a policy in place for

secondary market purchases, particularly for non-SLR securities. Other

problems of the wholesale investor category include :

Evaluation of investment performance continues to be based on profit or

loss on sale, and the concept of holding period returns is still alien.

The market is highly segmented as certain segments invest only for

statutory requirements.

Risk weightage for banks is based on statutory regulations rather than

rating assigned to the issue. As a result, a corporate debenture may sell at

yields higher than a PSU paper, reflecting an anomaly in pricing.

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Money market mutual funds are virtually non-existent, since their efforts

to mobilize funds have not been too successful. Till such time as

minimum lock-in period and the prohibition on provision of checking

facility by these funds continues, their popularity with retail investors will

remain low.

There are several restrictions on investment of surplus funds by public

sector enterprises viz.: bonds with a maximum tenure of one year, and

government securities with maximum residual maturity of three years.

PSEs therefore, take the easy way out and place their funds out in

Certificates of Deposit of approved banks. As a result, a large corpus of

funds is prevented from entering the debt market.

Chapter 6

6.1] Government securities market

Introduction

Government Securities are securities issued by the Government for raising a

public loan or as notified in the official Gazette. They consist of Government

Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger

Account. They may be in the form of Treasury Bills or Dated Government

Securities. Mostly Government Securities are interest bearing dated securities

issued by RBI on behalf of the Government of India. GOI uses these funds to

meet its expenditure commitments. These securities are generally fixed maturity

and fixed coupon securities carrying semi-annual coupon. Since the date of

maturity is specified in the securities, these are known as dated Government

securities, e.g. 8.24% GOI 2018 is a Central Government security maturing in

2018, which carries a coupon of 8.24% payable half yearly.

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Features of Government Securities

Issued at face value.

No default risk as the securities carry sovereign guarantee.

Liquidity as the investor can sell the security in the secondary market.

Interest payment on a half yearly basis on face value.

No tax deducted at source

Can be held in D-mat form.

Rate of interest and tenor of the security is fixed at the time of issuance

and is not subject to change (unless intrinsic to the security like FRB’s).

Redeemed at face value on maturity.

Maturity ranges from of 2-30 years.

Securities qualify as SLR investments (unless otherwise stated).

The dated Government securities market in India has two segments with

respect to banks:

1] Primary Market: The Primary Market consists of the issuers of the

securities, viz., Central and Sate Government and buyers include

Commercial Banks, Primary Dealers, Financial Institutions, Insurance

Companies & Co-operative Banks. RBI also has a scheme of non-

competitive bidding for small investors (see SBI DFHI Invest on our website

for further details).

2] Secondary Market: The Secondary Market includes Commercial banks,

Financial Institutions, Insurance Companies, Provident Funds, Trusts,

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Mutual Funds, Primary Dealers and Reserve Bank of India. Even Corporates

and Individuals can invest in Government Securities. The eligibility criteria

is specified in the relative Government notification.

Price Based:

In this type of auction, RBI announces the issue size or notified amount and the

tenor of the paper to be auctioned, as well as the coupon rate. The bidders

submit bids in terms of the price. This method of auction is normally used in

case of reissue of existing government securities. Bids at price lower then the

cut off price are rejected and bids higher then the cut off price are accepted.

Price Base deduction leads to a better price discovery then the Yield base

deduction. RBI holds uniform-price auctions.

Underwriting in Auction:

One day prior to the auction, bids are received from the Primary Dealers (PD)

indicating the amount they are willing to underwrite and the fee expected. The

auction committee of RBI then examines the bid on the basis of the market

condition and takes a decision on the amount to be underwritten and the fee to

be paid. In case of devolvement, the bids put in by the PD’s are set off against

the amount underwritten while deciding the amount of devolvement and in case

the auction is fully subscribed, the PD need not subscribe to the issue unless

they have bid for it.

G-Secs, State Development Loans & T-Bills are regularly sold by RBI through

periodic public auctions. SBI DFHI Ltd. is a leading Primary Dealer in

Government Securities. SBI DFHI Ltd gives investors an opportunity to buy

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G-Sec / SDLs / T-Bills at primary market auctions of RBI through its SBI DFHI

Invest scheme (details available on website itself). Investors may also invest in

high yielding Government Securities through “SBI DFHI Trade” where “buy

and sell price” and a buy and sell facility for select liquid scrips in the

secondary markets is offered.

Reforms in Secondary market in Government Securities.

A phased reduction in SLR requirements from an effective 37.4 per cent

in March 1992 to a little over 28 per cent in March 1996.It has since been

reduced to the statutory benchmark level of 25%.

The DFHI was authorized to deal in government securities in 1992-93

The Securities Trading Corporation of India (STCI) was set up in 1994 by

the RBI jointly with public sector banks and all India financial

institutions with the main objective of fostering the development of the

government securities market (It commenced operations in September

1994)

Market transparency was achieved through regular publication of details

of SGL transactions in Government securities put though Mumbai PDO

since September 1994.

After its establishment and becoming operational in June 1994, the

National Stock Exchange provided secondary market treading facilities

through its wholesale debt market segment.

A system of Delivery Versus Payment (DVP) in Government securities

was introduced in Mumbai in June 1995 to ensure that the transactions in

government securities were fully secured.

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The Repo market has been activated by allowing repos/reverse repos

transactions in all government securities besides treasury bills of all

maturities.

Non-bank entities which are holders of account with the RBI have been

allowed to enter reverse repo (but not direct) transactions with

banks/PDs

With a view to encouraging Mutual Funds to set up gilt funds in

government securities either by way of outright purchase or reverse repos

to the extent of 20 per cent of the outstanding investments.

Guidelines for satellite dealers in government securities market were

announced in December 1996 And in April 1997 and the RBI granted

approval to 17 entities for registration as satellite dealers in government

securities, to promote/activate retailing in Government securities.

RBI IN Securities

Transactions in securities are governed by the Securities Contracts

(Regulation) Act, 1956 as government securities are "Securities" as

defined in the Act. Hence the provisions of the Act are applicable for the

transactions in Government securities. Under the Act the Reserve Bank

has been delegated powers by the Government of India to regulate

contracts in government securities, money market securities, gold related

securities and derivatives based on these securities, as also ready forward

contracts in all debt instruments. Transactions on the stock exchanges

will be in addition subject to the regulations prescribed by the Securities

& Exchange Board of India (SEBI).

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Reserve Bank of India has permitted Repos and Reverse Repos subject to the

terms and conditions and among the participants as specified hereunder:

a. ready forward contracts are undertaken only in Treasury Bills and

transferable dated securities of all maturities issued by the Government of

India and State Governments.

b. ready forward contracts in the securities specified at (a) above may be

entered into by a banking company, a cooperative bank or any person,

maintaining a Subsidiary Ledger Account and a Current Account with

Reserve Bank of India, Mumbai, only among themselves.

c. such ready forward contracts shall be settled through the Subsidiary

General Ledger Accounts of the participants with Reserve Bank of India

at Mumbai only, and

d. no sale transaction should be put through without actually holding the

securities in the portfolio.

While RBI policy supports the establishment of a deep and liquid repo market,

enlargement of the types of securities and eligible participants for the repo

market will depend upon the establishment of the secure infrastructure for the

securities market including establishment of a Securities Clearing Corporation

to facilitate tri-partite repos .

Short selling in securities is prohibited. Presently, Over-the -Counter outright

transactions in government securities can be freely concluded providing for spot

delivery (payment on the same day of the contract or next day) as per the Act.

In order to develop the securities market on healthy lines and to facilitate price

discovery in the market, RBI daily makes available to the market the prices in

respect of secondary market transactions in government securities, which are

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settled through SGL Account. This has helped in the establishment of sovereign

yield curve, promoted market transparency and improved price discovery for

government securities in the Indian Market.

Effective management of public debt by the Reserve Bank is closely linked to

the development of a deep and liquid secondary market and RBI has been

taking various initiatives in this direction.

6.2] Securities and exchange board of India (SEBI)

Introduction

SEBI established in 1988 and became a fully autonomous body by the year

1992 with defined responsibilities to cover both development & regulation of

the market.

SEBI and its Role in the Secondary Market

The SEBI is the regulatory authority established under Section 3 of SEBI Act

1992 to protect the interests of the investors in securities and to promote the

development of, and to regulate, the securities market and for matters connected

therewith and incidental there to.

Functions and Responsibilities

SEBI has to be responsive to the needs of three groups, which constitute

the market:

The issuers of securities

The investors

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How SEBI came into picture

The World Bank and the International Monetary Fund (IMF) have introduced a

benchmark i.e., Financial Services Assessment Programme (FSAP) to

strengthen the monitoring of financial systems in the context of the IMF’s

bilateral surveillance and the World Bank’s financial sector development work.

The FSAP is designed to help countries enhance their resilience to crisis and

cross-border contagion, and to foster growth by promoting financial system

soundness and financial sector diversity. The mission of SEBI is to make India

as one of the best securities market of the world and SEBI as one of the most

respected regulator in the world. SEBI endeavors to achieve the standards of

IOSCO/FSAP. Amendments will be required to be made in the Securities Laws

especially the SEBI Act, which will facilitate India and SEBI to achieve above

objective.

Management

SEBI is managed by its chairman and five member and his departments such as

primary market department; issue management department; secondary market

department and institutional investment department. It has two advisory

committees, one each for primary and secondary market to provide advisory

guidance informing policies and regulations.

SEBI has been able to introduce certain measure such as:

1. Allotment of shares only if minimum 90% subscription is received

from the public.

2. To refund the application money in case of Non- allotment within 90

days.

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3. Payments of interest on refund amt after 30 days from date of closure

of issue.

4. Adequate disclosure of all material and specified risk factors

associated with project in the prospectus and the same to be attached

with share application form.

5. Publication of quarterly results.

6. Introduction of stock invests for subscription.

7. Free pricing of equity issues by companies.

8. Completion of allotment within 30.

6.3] Bankex

Introduction

Banking sector reforms such as fall in interest rates, and enactment of

Securitization Bill have given a major fillip to Indian banking industry. These

developments have significantly impacted the performance of bank stocks and

bank stocks have emerged as a major segment in the equity markets. Hence,

BSE considered it important to design an index exclusively for bank stocks.

The index, named as Bankex, is based on the free float methodology of index

construction. Bankex tracks the performance of the leading banking sector

stocks listed on the BSE. Twelve stocks, which represent 90 percent of the total

market capitalization of all banking sector stocks listed on BSE, are included in

the index. The base date for Bankex is 1st January 2002 and the base value is

1000 points.Bankex is disseminated on a real-time basis through BSE Online

Trading (BOLT) terminals.

Scrip Selection Criteria for BSE Bankex

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Scrips should at least have a trading frequency of 90% in preceding three

months.

Scrips classified under the banking sector and which constitute a part of

BSE-500 index are eligible for Bankex.

Scrips that are a part of Bankex should have a minimum market

capitalization coverage of 90% in banking sector based on free-float final

rank.

Stocks Constituting Bankex

UTI Bank Ltd

Kotak Mahindra Bank

UCO Bank

Indian Overseas Bank

Jammu & Kashmir Bank

Vijaya Bank

Allahabad Bank Ltd

Centurion Bank Ltd

Indusind Bank Ltd

Karnataka Bank Limited

Federal Bank Ltd

Yes Bank Ltd

IDBI Bank Ltd

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Indusind Bank Ltd

Bankex was launched by BSE to track the performance of the leading

banking sectors as bank stocks are emerging as a major segment of the

stock market. The base date for BANKEX is 1st January 2002 and

base value for BANKEX is 1000 points. Bankex Index includes 12

selected major stocks which represent total 90% market capitalization

of all the banking sector stocks listed on the BSE.

Feature

A few important features of the BANKEX are given below:

BANKEX tracks the performance of the leading banking sector

stocks listed on the BSE.

BANKEX is based on the free-float methodology of index

construction

The base date for BANKEX is 1st January 2002.

The base value for BANKEX is 1000 points.

BSE has calculated the historical index values of BANKEX

since 1st January 2002.

Stocks which represent 90 percent of the total market

capitalization of all banking sector stocks listed on BSE are

included in the Index.

The Index is disseminated on a real-time basis through BSE

Online Trading (BOLT) terminals.

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Stocks forming part of the BANKEX along with the particulars

of their free-float adjusted market capitalization are listed

below.

Chapter 7

EXAMPLE OF IN SECONDARY MARKET

1] Indian banks line up Tata-Corus debt in secondary market

Mumbai, Oct 15: Indian banks, after missing out in their direct exposure in the

$6 billion syndicated Tata-Corus deal, have lined up to participate in a big way

in the secondary market for the deal, conducted by Standard Chartered Bank.

The UK-based Standard Chartered, which was one of the banks to have

syndicated the Tata-Corus funding deal, has already offloaded a majority of its

own $2.5 billion exposure in secondary market transactions. A number of

Indian banks, including State Bank of India (SBI), have bought parts of the debt

from Standard Chartered. SBI alone has bought over $1 billion of the Tata-

Corus debt from Standard Chartered Bank. StanChart is hardly left with $750

million of the debt in its own book and would like to bring it to zero in future.

The Tata Group is the largest global institutional customer of Standard

Chartered Bank. “By offloading the entire Tata-Corus funding, we will be again

in a position to expand our exposure further for the group,” said Bala Swami

Nathan, managing director, regional head-client relationships, India & South

Asia. For Standard Chartered, the secondary market transactions have been very

profitable as the banks, which bought in the secondary market had to buy at

slightly higher rates than the rate at which the deal was struck with the original

financial institutions. Besides, the US subprime crisis had its impact on the

75


rates. The secondary market deal has a mechanism called ‘price flex’ by which

the new higher rates are agreed among the original funding agencies,

institutions which take exposure in the secondary market and the company

which had received the original funding. According to Swaminathan, the bank

had already committed over $10 billion to India Inc for overseas buys over a

one-year period. Meanwhile, the bank globally has acquired two small

companies- one aircraft leasing company, Pembroke and one oil and gas

consultancy firm, Harrison Lovegrove, which will have Indian implications.

2] Generically, any market that depends on the existence of the primary market.

The prices in the secondary market are partially dependent on the prices in the

primary market.

A catch-all term for any market whose existence depends on the products

created in the primary market, whether it be cars, farm equipment, mortgages,

BANKER'S ACCEPTANCES, TREASURIES, CERTIFICATES OF

DEPOSIT, PROMISSORY NOTES, etc.

This is just one example : a lending bank (primary market) holding

SEASONED individual mortgages on its own customers, i.e. mortgages on

which the payments have a good record for at least one year, can sell a block of

these qualified mortgages to a finance company, let's say ABC Mortgage

(secondary market), a large investor in mortgages.

ABC pays the lending bank the risk-adjusted fair value of those mortgages.

ABC gets the full rights to all remaining interest and principal payments. (In

many instances, the lending bank continues to collect the mortgage payments

for an administration fee, so you may not know that your loan has been sold, but

this in no way affects either the value of your loan or your obligations).

76

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/seasoned_securities.htm

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/promissory_note.htm

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/certificate_of_deposit.htm

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/certificate_of_deposit.htm

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/treasuries.htm

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/bankers_acceptance.htm


Here is another example: the lending bank owns individually qualified

mortgages for a nanosecond and sells them by established contract to ABC

Mortgage. The lending bank profits by the points it collected from the

borrower, and by the administration fee it is paid by ABC for collecting the

monthly payments from the borrower.In each case, the value of each individual

mortgage is judged by the terms of the loan, the quality of the lender, and

various calculations based on risk-adjusted fair value calculation standards for

the current market.

The Scam: Swindlers involved in HIGH-YIELD INVESTMENT PROGRAM

scams often refer to the Secondary Market as pension funds, brokerage houses,

Trusts, and insurance companies that purchase FRESH CUT SECURITIES

created in bulk* once they have been seasoned for as short a period as

overnight. The swindler tells a potential investor that enormous profits can be

made by purchasing these fresh cut securities and selling them the next day in

the Secondary Market.

The con artist tells you that "seasoned" means that the Secondary Market cannot

purchase securities directly from the issuer. The con artist must use your money

to create the securities or purchase the securities, known in ScamSpeak™ as a

FUNDS FIRST deal. Once this has been accomplished, the securities are

considered a safe investment by the Secondary Market.

The scammer would have you believe that securities are created in bulk, run off

the printing press in batches, as it were - unattached to individual specific

transactions.

77

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/funds_first.htm

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/fresh_cut_securities.htm

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/high-yield_investment_programs.htm


This is complete hogwash and bears absolutely no resemblance to actual

issuance and trade of securities, BANK GUARANTEES, or LETTERS OF

CREDIT.

However, the banks could report lower provisioning during the quarter due to a

change in secondary market conditions, it added.” Due to improvement in the

secondary market conditions, depreciation on investments was written back

during the quarter, helping banks to lower total provisioning cost,"

The year-on-year credit growth of top banks fell to 15.1 per cent for the month

ended June 2009, the lowest level since March, 2004, the report said.

Also, the top 12 lenders restructured loans worth Rs 32,530 crore in FY10,

taking the total restructured assets to nearly Rs 73,000 crore, with public-sector

banks taking lead in the process, the report said.

However, the proportion of total restructured advances to total loans remained

within a comfortable level of 4 per cent, the report said.

The top 12 lenders – State Bank of India, Bank of Baroda, Bank of India,

Canara Bank, Axis Bank, HDFC Bank, ICICI Bank, IDBI Bank, Central

Bank of India, Punjab National Bank, Union Bank of India and Syndicate

Bank – covers 61 per cent of the credits in India.

ICICI Bank

ICICI Bank started as a wholly owned subsidiary of ICICI Limited, an Indian

financial institution, in 1994. Four years later, when the company offered ICICI

Bank's shares to the public, ICICI's shareholding was reduced to 46%. In the

year 2000, ICICI Bank offered made an equity offering in the form of ADRs on

the New York Stock Exchange (NYSE), thereby becoming the first Indian

company and the first bank or financial institution from non-Japan Asia to be

78

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/letter_of_credit.htm

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/letter_of_credit.htm

http://www.fraudaid.com/Dictionary-of-Financial-Scam-Terms/bank_guarantee.htm


listed on the NYSE. In the next year, it acquired the Bank of Madura Limited in

an all-stock amalgamation. Later in the year and the next fiscal year, the bank

made secondary market sales to institutional investors.

With a change in the corporate structure and the budding competition in the

Indian Banking industry, the management of both ICICI and ICICI Bank were

of the opinion that a merger between the two entities would prove to be an

essential step. It was in 2001 that the Boards of Directors of ICICI and ICICI

Bank sanctioned the amalgamation of ICICI and two of its wholly-owned retail

finance subsidiaries, ICICI Personal Financial Services Limited and ICICI

Capital Services Limited, with ICICI Bank. In the following year, the merger

was approved by its shareholders, the High Court of Gujarat at Ahmedabad as

well as the High Court of Judicature at Mumbai and the Reserve Bank of India.

Present Scenario

ICICI Bank has its equity shares listed in India on Bombay Stock

Exchange and the National Stock Exchange of India Limited. Overseas,

its American Depositary Receipts (ADRs) are listed on the New York

Stock Exchange (NYSE). As of December 31, 2008, ICICI is India's

second-largest bank, boasting an asset value of Rs. 3,744.10 billion and

profit after tax Rs. 30.14 billion, for the nine months, that ended on

December 31, 2008.

PUNJAB NATIONAL BANK

PNB Gilts, a wholly owned subsidiary of Punjab National Bank (PNB),

acquired licence to operate as primary dealer in government securities market in

1996. Punjab National Bank holds 74% of the total capital of PNB Gilts with

other institution such as IDBI, UTI, Punjab & Sindh Bank, Industrial

Investment Bank of India holding sizeable stake. The company was initiated

with the view of enforcing the view of Narsiman committee and RBI’s norm of

regulating the debt market.

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PNB Gilts is the intermediary whose role is to participate in primary auctions

and open market operation of G-Secs conducted by RBI and participates in

secondary market operations of treasury bills, G-Secs and rated bonds. PNB

Gilts currently trades in mainly in soverign or highly rated paper with portfolio

size of Rs.1171 crores. The sheer quality of paper provides better liquidity and

low default risk.

Description Rs. in crores % of total

Government securities 786.80 67%

State loan 17.50 2%

Treasury Bills 34.75 3%

Bonds 332.04 28%

1171.08

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CONCLUSION

It is very evident from the performance of the Bankex that banks are stealing the

thunder of other market heavy weights. The banking sector is playing a major

role in the secondary markets. The banks are making maximum profit out of

the boon in the economy and are providing a platform for mobilizing more

funds in the market.

The private sector is ate the help of the growth in the banks. The role of Banks

in the secondary market has become very significant since the liberalization of

the economy; the future of the banking sector is very bright and will enjoy more

success with healthy competition, steady growth, and greater stability.

81


RECOMMENDATIONS

There is no doubt that banks are playing a vital role in the secondary markets.

Still there are many banks that haven’t gone public yet. This project has helped

me understand that banks play an important role in the growth of the secondary

market and the secondary market plays an important role in the banks

development. Keeping the growth and development of several banks in mind I

have a few recommendations on the project prepared as follows:

More banks should become public and issue IPO’s which would in turn

help both banks and the depositors in more than one ways.

The banks will get more funds to not only carry out their regular

operations but also carry out various other financial services.

It will also give the banks to restructure themselves and integrate more

technology in to the services provided to the customers. It will also make

the functioning of the bank more transparent for the depositors and the

shareholders.

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BIBLIOGRAPHY

Books:

Changing pattern of capital markets in India: an analytical study

- Gaddam Naresh Reddy

- Publisher: Cyber tech publications 2007.

Capital market reforms and individual investors

- Rajarajen vanjeko

- Publisher : Dominant publishers and Distributors, 2008

Stock Market in India

- D. R. Veena

- Publisher: Ashish, 1988

Indian Capital Markets: Recent Trends and Reforms

- Arindam Banerjee

- Publisher: Icfai university

MAGAZINE:

Survey of Indian Industry, 2008

Websites:

www.altavista.com

www.sec.gov.com

www.icicibank.com

www.rbi.com

www.sbi.co.in

www.lycos.com

www.banknet.com

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http://www.banknet.com/

http://www.lycos.com/

http://www.sbi.co.in/

http://www.rbi.com/

http://www.icicibank.com/

http://www.sec.gov.com/

http://www.altavista.com/

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